Stop Order, Stop Loss

What is a Stop Order?

A stop order is a type of trade order that becomes a market order once a specified price is reached, known as the “stop price.” Unlike limit orders, which execute only at a predetermined price or better, stop orders trigger a trade when the market reaches the stop price, at which point the order becomes a regular market order that executes at the best available price. This feature allows traders to automate their trades based on market movements.

There are two main types of stop orders:

1. Stop-Loss Orders: Used to limit potential losses by selling an asset once it falls to a certain price.
2. Stop-Buy Orders: Used to enter a position or buy an asset once it rises to a specific price.

How Stop Orders Work

1. Stop-Loss Order (For Selling): A stop-loss order is designed to minimise losses by automatically selling an asset once its price falls to a specified level. For example, if a trader owns Token A and wants to prevent a significant loss, they might set a stop-loss order at $50. If Token A’s price drops to $50, the stop order is triggered, converting it into a market order, and the asset is sold at the best available price.
2. Stop-Buy Order (For Buying): A stop-buy order purchases an asset once its price reaches a certain level. This order type is often used when traders want to capitalise on upward momentum. For instance, if Token B is trading at $40 but a trader believes it will continue rising once it hits $45, they can set a stop-buy order at $45. The stop order triggers when the price reaches $45, and Token B is bought at the market price.

Key Benefits of Stop Orders

1. Automated Trading: Stop orders allow for hands-off trading by automating the process. Traders don’t need to monitor the market constantly—once the stop price is reached, the trade is triggered automatically.
2. Risk Management: A stop-loss order helps protect traders from large losses by automatically selling an asset when its price drops below a certain level. This is especially useful in volatile markets.
3. Capitalising on Price Trends: Stop-buy orders enable traders to enter a position only when the asset reaches a certain price, allowing them to take advantage of upward price trends without constantly monitoring the market.
4. Execution Speed: Once the stop price is triggered, the order is executed at the best available price, ensuring the trade occurs quickly, especially in fast-moving markets.

Example of Stop Orders in Action

• Stop-Loss Example: A trader owns 100 tokens of Token C, currently priced at $30. They want to limit potential losses if the price drops, so they set a stop-loss order at $25. If Token C falls to $25, the stop-loss order is triggered, converting into a market order that sells the tokens at the next available price, minimising further losses.
• Stop-Buy Example: A trader is watching Token D, currently priced at $20, and believes it will continue to rise once it reaches $25. They set a stop-buy order at $25. If Token D’s price reaches $25, the order triggers, and the trader buys the tokens at the best available price, potentially benefiting from continued upward momentum.

Stop Orders vs. Limit Orders

• Stop Orders: When the stop price is reached, trigger a market order. These orders are useful for protecting against losses or capitalising on upward momentum, but do not guarantee the exact execution price, as they convert to market orders.
• Limit Orders: Execute only at a specified price or better. They guarantee the trade price but may not be executed if the market never reaches the set limit.

Potential Risks of Stop Orders

• Price Slippage: Since stop orders convert to market orders once the stop price is reached, the actual trade price may differ from the stop price, especially in volatile markets or during periods of low liquidity.
• Gaps in Price: In fast-moving markets, the asset price could drop or rise significantly beyond the stop price before the trade is executed, resulting in a larger loss or less favourable purchase price than expected.

How to Create a Stop Loss Order

Total time: 10 minutes

Choose Stop

From the trading screen, choose “Stop” to start a Stop order.

Specify the sell amount

In the first input, specify the asset you are selling and the amount of the asset you’re selling. In this case, we will sell $MIN tokens if the price drops further.

Setting the Stop Price

Set the price at which you wish to sell the asset. The predefined percentage options can help you do this. In this case, we chose to sell the asset at 10% of the current market price.

Set the expiry time

Set the expiry time for the trade. If the token price doesn’t sell by the end of the time limit, the assets will be returned to your wallet. This will free up the funds and allow you to perform a new trade. Click on “Place order” to continue.

Sign and submit

Sign the transaction and click “Sign and Submit” to submit the transaction on-chain and execute the smart contract.